A mortgage is a traditional financial product that allows a person or persons to finance or re-finance the purchase of a home. A home equity loan is another financial product that allows a home owner to obtain funds by mortgaging the value of his or her existing home, or at least the equity in the home. A home equity loan can be obtained from a financial institution by the home owner, who may be referred to by the financial institution as a “customer” or “borrower.” The customer takes out the loan and a lien is placed on the home by the financial institution so that the loan is secured by the equity in the home. As with a mortgage, the borrower makes payments with interest to the financial institution for the life of the loan.
The loan may be taken out as a lump sum, or may be set up as a line of credit, where the borrower draws on the line as money is needed. In the case of the line of credit, monthly payments are adjusted accordingly for the outstanding balance at any given time. Such a line of credit is some times referred to as an “LOC” or, because it is based on home equity, as a home equity LOC or “HELOC.” The amount of the loan, or the size of the line of credit is calculated as a percentage of the value of the equity in the borrower's home, and this percentage is commonly referred to as the loan-to-value (LTV) ratio or percentage, or simply as the “LTV.” This percentage might also be referred to as the “combined loan to collateral value ratio” (CLTV) if there is more than one loan secured by the property. If a customer needs additional funds, the customer can apply for an increase in the maximum amount of funds available from the LOC, which can then be approved and closed in much the same manner as a new loan is approved and closed, with any required re-recording of the lien. Whether such an increase also amounts to an increase in the LTV ratio for the loan depends on the current value of the residence securing the loan.